British Steel signalled the peak of the European steel cycle yesterday, warning that a slowdown in demand in the second half could lead to a cut in production. Despite the gloomy comments from the chairman and chief executive, Brian Moffat, however, the shares edged 2p higher to close at 159p as profits in the six months to September soared and the dividend was marked 50 per cent higher.

Mr Moffat said: "The last quarter has seen an easing of demand due to over-stocking in customers' supply chains and, as a result, a number of European producers have recently announced a cutback in production to exert a steadying influence on prices." His comments were confirmed by figures from the French steel federation showing a 2.8 per cent decline in production in October compared to 12 months ago, dragging back growth for the first 10 months of the year to less than 5 per cent.

The uncertain outlook took the shine off what appeared to be excellent profits growth, showing a jump in pre-tax profits from pounds 159m to pounds 550m, only pounds 28m short of the total for the whole of the year to March. The results were the latest improvement in the company's rapid recovery from heavy losses in 1992 and 1993.

Earnings per share jumped from 6.49p to 19.3p and the interim dividend soared from 2p to 3p. Mr Moffat confirmed that it was British Steel's intention to pay two-thirds of the payout at the final stage, implying a total dividend of 9p, compared to last year's 7.5p.

Mr Moffat described the softening of demand in Europe, which accounts for 86 per cent of British Steel's sales, as "a blip" and said the group would mitigate any downturn in prices by attacking other overseas markets. He added that underlying consumption of the company's products was still "reasonably good".

He said possible production cut-backs would not lead to large-scale redundancies or plant closures, but he refused to rule out job losses. Two months ago, the company shed 520 jobs after closing its seamless tube plant at Wednesfield in the Midlands.

Despite the slowdown in the market, British Steel is pressing ahead with a capital expenditure programme that will cost pounds 400m this year, including spending at the Swedish stainless steel group Avesta Sheffield, a former 49.9 per cent associate that the company now consolidates following the acquisition of a further 1.1 per cent to gain control.

Mr Moffat confirmed that, although British Steel still operated in a highly cyclical industry, he believed the next downturn would be less severe than other recent slumps. He thought privatisation of previously state-owned European steel manufacturers would encourage more commerical attitudes in the industry. That and a marked reduction in capacity had reduced the risk of overproduction.